Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

What is an example of straight-line depreciation?

1. A building that is 30 years old but can be used for another 30 years

2. An old vehicle that has no remaining value

3. Office equipment that rapidly loses value in the first year

4. A historic property never used for business

The correct answer is: A building that is 30 years old but can be used for another 30 years

Straight-line depreciation is a method of allocating the cost of an asset evenly over its useful life. This approach assumes that the asset will lose value at a constant rate over time. In the case of the building that is 30 years old but can still be used for another 30 years, it reflects a scenario where the building has a predictable and extended useful life. By utilizing straight-line depreciation, the cost of the building can be spread evenly across its 60-year useful life, which provides a stable method for financial reporting and tax purposes. In contrast, the other choices do not exemplify straight-line depreciation. An old vehicle with no remaining value suggests that it has already fully depreciated, thus does not pertain to the concept of progressive depreciation over time. Office equipment that loses value rapidly in the first year indicates a more accelerated depreciation method, such as double-declining balance, rather than straight-line. Lastly, a historic property never used for business typically would not undergo standard depreciation processes since it does not generate income and is not considered a depreciable asset in a traditional sense.